Millions still lose out after Brown tax U-turn

The 10p tax issue may yet return to haunt Gordon Brown despite last week's £2.7bn compensation package, according to a study published today.

The independent Institute for Fiscal Studies (IFS) warns that six million people will still be worse off as a result of the abolition of the 10p rate of income tax despite the Government's climbdown. It also found that 18 million families will be an average of £150 a year worse off over the next two years unless the Government extends the one-off £160 tax cut, which will soften the blow from ending the 10p rate this year.

Last week, Labour MPs welcomed the surprisingly generous package announced by the Chancellor, Alistair Darling. But a detailed analysis by the IFS calculates that the six million people who will still pay more tax this year will include those under 65 on incomes of between £6,535 and £13,355 a year. The biggest losers will people earning £7,755 a year, who will be £112 worse off.

Although most of these losers will have a partner or spouse who is better off as a result of the tax shake-up, some 900,000 families will still be an average £83 a year worse off overall. According to the IFS, these will include 500,000 childless single adults under 25, 140,000 childless couples both aged 20 to 25 and 115,000 childless single adults aged 25 to 55.

Today's report will raise fears that the Government faces a "ticking tax timebomb". If it does not continue the £160 tax cut, it might provoke a backlash among the losers. But it is so strapped for money that it may struggle to maintain the payments.

The IFS predicts that political pressures will force Mr Darling to prolong the tax cuts but that this would require another rise in borrowing which would further tarnish Labour's economic credentials.

Robert Chote, the director of the IFS, said: "By announcing a big, one-off increase in the personal income tax allowance, Alastair Darling has not only created millions of winners this year; he has created millions of potential losers next year. On the evidence of its recent decisions, the Government may well be afraid to take their gains away from them.

"If public sector borrowing ends up permanently higher as a result, it will further undermine the credibility of the Government's management of the public finances and increase the probability of future tax increases or spending cuts – perhaps soon after the next general election."

The shadow Chancellor, George Osborne, said: "Here is independent evidence of Gordon Brown's compensation con on the 10p tax rate. His cynical manoeuvre to save his own political skin will leave 18 million families facing a tax rise next year. This is what happens when short-term politics gets in the way of the long-term interests of the country."

Ministers say the issue will be considered by Mr Darling when he draws up his pre-Budget report this autumn. Labour MPs admit the tax cut has made little impact on the public yet – or in the campaign for tomorrow's by-election in Crewe and Nantwich – because it will not be in people's pay packets until September.

The IFS says that the Government is giving away £5.5 bn this year as a result of the personal tax and other changes announced in Mr Brown's final Budget.